Britain's Autumn Statement

Unfunded promises?

On December 5th George Osborne, the British chancellor, delivered the Autumn Statement, where he outlined the British government's economic policy for the next few months. We are hosting a round-table discussion of the Statement and the prospects for the British economy. Next up is Paul Johnson, director of the Institute for Fiscal Studies, a think-tank.

LAST WEEK'S Autumn Statement finally contained some good news. Growth this year and next will be higher than predicted back in March. But that good news hides some rather more disappointing news. All that additional growth is judged by the Office for Budget Responsibility (OBR) to be cyclical.

All that has happened, according to the OBR, is that the growth they were expecting anyway has come along a bit sooner than expected. As a result there is no improvement in underlying borrowing numbers. Of course it is good to get some growth under our belts after such a long period of stagnation. And getting it early does have some useful fiscal consequences. In particular forecast levels of public sector debt have come down quite appreciably—though it is still forecast to peak at 80% of national income.

But to be consistent with the strategy he has been pursuing the chancellor could not afford a net giveaway in last week’s Autumn Statement. Whether he has achieved that is questionable. He has really only achieved neutrality by stating that a series of definite giveaways—tax cuts and specific spending pledges—will be accommodated within the very tight spending envelope he had already set himself, and by assuming that still more anti-avoidance measures will be successful. Continuing to announce tax cuts and to make new spending commitments, unfunded beyond 2015-16, can only increase the difficulty of reaching the fiscal balance he is targeting.

Furthermore he has said that he wants to extend the effective consolidation for another year, into 2018-19 by freezing total spending that year. That implies another hefty cut to departmental budgets. He doesn’t need to do that to meet the government’s fiscal targets. And, if he is still in number 11, he may not find it easy given the pressures on spending that will without doubt have built up by then. As the OBR has pointed out, achieving this would require “general government consumption to fall to its lowest level as a share of national income since consistent data began in 1948”.

His plans imply an acceleration in the rate of public service spending cuts—from 2.3% a year between April 2011 and March 2016, to 3.7% a year between April 2016 and March 2019. Simply to avoid such an acceleration in cuts in this kind of spending would require cuts in welfare (or other) spending, or tax rises, of a further £12 billion ($20 billion) a year by 2018-19.

But before that the chancellor has not helped himself to achieve the fiscal neutrality he claims to be targeting. Why so?

First, there is a series of tax cuts—on fuel duties, marriage allowances, employer National Insurance (NI) contributions and business rates—which between them will cost around £2.5 billion a year into the medium term. They are only partially offset by an (uncertain) extra half a billion from an increase in the bank levy and an even more uncertain billion or so from anti-avoidance measures. The scorecard shows the net cost approaching £1 billion annually in 2018-19. Since no new spending measures are scored that far out, this is in fact a small medium term giveaway.

Second, the annual £750 million cost of the free school meals policy is assumed to be swallowed up within the overall spending envelope from 2016-17. In other words that cost will have to be found at a later date by cutting even deeper into other spending. This is the last in a line of announcements of substantial spending increases which will have to fit within the shrinking spending envelope that has been set for 2016 and beyond. Recall promises to increase spending on social care and on childcare made in the budget. And don’t forget the nearly £4 billion a year in additional NI payments that public sector employers will need to make. Between them these commitments add around £7 billion of additional spending pressures into the period from 2015-16.

Third, in his speech the chancellor claimed that the additional cost of student loans arising from lifting the cap on the number of students in higher education would be “financed by selling the old student loan book”. This may work in the near-term fiscal numbers, but economically it makes little sense. Selling the loan book will be broadly fiscally neutral in the long run, bringing in more money now at the expense of less money later on. Lifting the cap on numbers will cost money every year.

The chancellor continues to make specific promises on spending increases whilst stating that he will keep total spending at the same level. He can’t keep doing that. And whilst the costs of his tax cuts are pretty definite, the benefits from his anti-avoidance measures, and indeed of the increase in the bank levy, are rather less certain.